Italy Turns Its Focus to Stimulating Economy

Thursday

Dec 29, 2011 at 10:03 PM

Prime Minister Mario Monti warned of “much more to do” as Rome struggled to sell government bonds Thursday.

ELISABETTA POVOLEDO and HARVEY MORRIS

ROME — Italy sold a second bundle of government debt Thursday at a lower borrowing cost, but Prime Minister Mario Monti warned that his government had further work to do to restore growth and investor confidence in the economy.

The benchmark 10-year bond was priced at an auction Thursday to yield 6.98 percent, down from a euro-era record of 7.56 at the previous sale in late November. The Italian Treasury also sold bonds maturing in 2014, priced to yield 5.62 percent, down from 7.89 percent.

The total of €7 billion, or $9.1 billion, sold Thursday in thin holiday markets was less than the goal of €8.5 billion.

At an auction of €9 billion in short-term Treasury bills Wednesday, rates fell by half from previous levels. But the sale Thursday was seen as a more significant signal of market sentiment about the longer-term outlook for Italy’s struggling economy.

The continuing high yields on 10-year bonds, just shy of the 7 percent level that many economists consider unsustainable, indicated the continuing challenges ahead. Mr. Monti acknowledged the point at a news conference after the bond sale. “We absolutely don’t consider the market turbulence to be over,” he said. “There is much more to do.”

In the near term, Mr. Monti said, his government plans to stimulate growth in the Italian economy through a package of measures that he suggested could be called “Grow Italy” — a contrast to the €30 billion austerity package, known as Save Italy, that was passed by Parliament this month.

The growth package will include moves to further open up Italy’s closed professions and guilds, encourage competition and develop an outdated economic infrastructure, which many analysts say keep production costs high and uncompetitive in world markets.

The government will also tackle labor policy, a thorny issue for unions as well as for some political parties that support Mr. Monti’s government. The prime minister said the changes would be matched by an increase in welfare services for the unemployed and for Italian youth.

The austerity package, the fourth since August, is designed to eliminate Italy’s budget deficit by 2013. It is likely to be the last for some time, as Mr. Monti said Thursday that he did not foresee the need to ask Parliament to authorize new spending in the near future.

He also said his government was “not excluding anything” in looking for ways to lower a public debt of 119 percent of gross domestic product, the second-highest ratio in the euro zone, after that of Greece.

“I know people are worried” about paying higher taxes, he said.

The austerity package and the growth measures are a two-pronged approach to steering Italy out of a debt crisis that has placed the global economy at risk, a strategy that early indicators suggest has only been partly successful.

Italy had its biggest decline in Christmas retail sales in 10 years, according to data released this week by the consumer group Codacons.

Critics of the government’s economic program have complained that it is too tax-heavy and not incisive enough when it comes to cuts to public spending.

They also criticize the lack of measures to stimulate growth, though some analysts say Mr. Monti is bound by restrictions, imposed primarily by Germany and other euro zone partners, that hamper any real growth.

If Italy is required to pursue policies that bind it to lowering its debt and balancing the budget by 2013, then “welcome to a future of stagnation and recession,” Gustavo Piga, a professor of economics at the University of Rome Tor Vergata, said Thursday.

“Do you think that if you liberalize Roman taxi drivers you’ll generate growth tomorrow?” Mr. Piga asked. “It’s important to start reforms, but you also need to stimulate demand.”

“The deal that needs to be struck is to ensure that Italy does not go through a recession like Greece,” he said. “The problem is larger than us.”

Mr. Monti said Thursday that, as an economist, he was aware that the austerity package pledged by the previous government of Silvio Berlusconi had “many drawbacks.” But not passing the measures would have had a more serious and even more recessionary outcome, he said.

He added that a long-term solution required that “work must be done in Europe” within a more integrated framework. Some of the measures, he said, could be drafted in time to present them to a meeting of euro zone finance ministers in Brussels on Jan. 23.

“Italy is making a great effort. It is looking to build a better future on less ephemeral foundations, to safeguard future generations,” Mr. Monti said.

Mr. Monti also said that the euro zone bailout fund, the European Financial Stability Facility, needed “significantly greater” resources, even if those resources were never to be effectively used.

Harvey Morris reported from London.

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